Weekly Digest: Oil v. Stocks, Earnings, and RSI

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition also includes "Three things to watch." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.  

Not every rally in oil of late has set off selling in equities, as it did last month, and the "buy the dip" philosophy appeared again in recent sessions. Wall Street's lesser emphasis on crude might reflect the CME futures curve, where contracts farther out like October and November trade below $80 per barrel. This means for now, the futures market prices in at least some relief at the pump this year. Crude traded near $65 before the war, so the market doesn't suggest a return to those relatively cheap levels anytime soon. The sudden drop in crude and less market correlation doesn't mean the world economy is out of the woods, either. The International Monetary Fund, or IMF, said Tuesday that the war will slow global economic growth, adding that the "outlook has abruptly darkened" and the war interrupted what had been a steady growth trajectory.

Earnings growth is expected to be double digits again for S&P 500 stocks, analysts say, though they've set the bar high and guidance could be watched for any wobbles considering the war and impacts on oil. Abroad, earnings estimates are also up, and overseas markets are keying off that. Earnings growth estimates vary across countries, but the tech sector has seen uneven revisions in many regions, falling notably in China due to increased capital expenditures. "The question is what happens once earnings season occurs, and whether companies will guide downward or upward, to the extent higher input prices are absorbed into profit margins or passed along to end customers," said Michelle Gibley, director of international equity research at the Schwab Center for Financial Research (SCFR). 

Over the last decade, U.S. crude production surged to record highs above 13 million barrels per day and stayed there. While that's not enough to supply all U.S. needs, most of its imports are from other North American countries, raising questions about why gasoline prices spiked here along with in Asia and Europe, where imports from the war-torn Middle East dominate. It goes back to crude oil and other energy products being part of a global market, with growing overseas import demand for U.S. oil contributing to higher U.S. prices even as parts of the U.S. rely on costly imports of gasoline from places like South Korea and the Netherlands. "Many analysts have been saying that the implications of the closure of the strait are more dire for Asia, which relies on Middle East oil, and Europe, where liquefied natural gas is in high demand, than they are for the United States," said Michael Townsend, managing director of legislative and regulatory affairs at Schwab. "And that may be technically true. But oil is priced globally. There's not one price for oil headed to Asia and another price for oil headed to the United States."

Earnings from big banks this week reassured investors that despite the war, the U.S. economy remains on relatively solid footing. Several banks lowered their provisions for loan losses, meaning they see less need for heavy amounts of cash on hand to guard against defaults on loans. Also, wealth management and trading results looked solid in the first quarter, with Morgan Stanley (MS) delivering better than expected trading activity. Bank of America (BAC) said in its release Wednesday that it saw "solid consumer spending and stable asset quality." And JPMorgan Chase (JPM) CEO Jamie Dimon also observed consumer resilience and said private credit issues aren't likely to be a systemic event. This could suggest he's less worried about the "cockroaches" he referred to last fall when he warned of possible problems in the credit market. Credit spreads are still relatively tight despite the war and overall market volatility, another sign of possible stability below the economy's surface. Bank earnings can sometimes set the tone for an entire reporting season, as these businesses tend to have a close view of economic activity across many sectors. Nothing any of the big banks' executives said in their earnings calls this week appeared to spark fresh economic worries.

The stock market appears overbought in the near-term, but that doesn’t mean it can't continue to "melt up," my colleague Peterson said. The Relative Strength Index, or RSI, which indicates momentum strength, rose this week to nearly 70 from below 30 at its low last month for the SPX. However, 70 traditionally hints at overbought levels. The narrowing of the rally during Wednesday's session is possibly a cautionary sign. The mega-cap-dominated info tech, discretionary, and communications sectors all posted gains of 1% or more, with tech up nearly 2%. Financials also climbed. But industrials and materials fell 1% or more, possibly reflecting economic concerns in areas of the economy closely associated with manufacturing. Also, market breadth—which can help investors gauge market strength—has stalled this week near 50% of S&P 500 stocks trading above their 50-day moving average. That's sharply higher than last month but still below the 60% to 70% frequently seen earlier this year when most sectors charged higher. "In my view, the reason investors have been eager to buy the dip is because S&P EPS growth forecasts have been moving higher over the past couple weeks, the AI secular growth story remains intact, and there's a tendency to compare the Iran war to Trump’s Liberation Day tariffs or the Russian invasion of Ukraine, both of which resulted in a market recovery," said Peterson.